Bad Blood: Secrets and Lies in a Silicon Valley Startup

In November 2006, a team from medical equipment startup Theranos, led by founder and CEO Elizabeth Holmes, met in Europe with pharmaceutical corporation Novartis to demonstrate Theranos’ “cutting-edge blood-testing system" (3). Elizabeth announced that the meeting went perfectly, but chief financial officer Henry Mosley heard opposing rumors.

Theranos’ management team included several high-powered, experienced executives, such as Mosley. The company’s big product was a toaster-sized machine that could supposedly read and analyze a drop of blood in moments, greatly speeding up blood testing during drug trials. Team members returning from Europe, however, confessed to Mosley that the machines didn't always work, so they’d filmed a session when it did work and played that during demonstrations, pretending it was a live result. Investors, deceived, were signing up.

Mosley met with Elizabeth, whose piercing blue eyes, deep voice, and intense optimism he found “almost hypnotic.” They discussed the just-completed third round of funding for Theranos, which was then valued at $165 million. Mosley mentioned the faked blood test: “We’ve been fooling investors. We can’t keep doing that" (8). Holmes, icy, fired Mosley and told him to leave immediately

Elizabeth Holmes descended from Charles Fleischmann, founder of the Fleischmann Yeast fortune, and from a top Pentagon official during the 1970s who, in turn, descended from one of Napoleon’s field marshals. Her parents worked in government in Washington DC; later, Elizabeth's father worked for oil companies Tenneco and Enron. Her parents made clear the importance of a purposeful and distinguished life. From a young age, Elizabeth wanted to be “a billionaire” married to a US president. She was a highly competitive Monopoly player and a sore loser.

In high school at a posh private academy in Houston, Elizabeth took an interest in science, studied hard, and got straight As: “It was the start of a lifelong pattern: work hard and sleep little" (11). She set her sights on Stanford University, where many famous tech companies had been born, and was awarded a President’s Scholarship. Elizabeth studied chemical engineering under the charismatic Channing Robertson. Hardworking, she also was socially active, though one boyfriend said she was guarded and “played things close to the vest" (13).

Following a summer internship in Singapore to study SARS patient specimens, Elizabeth dropped out of school in 2003 and put all her energies into starting a company that would produce an arm patch that diagnosed and treated diseases. She showed her work to Robertson and PhD candidate Shaunak Roy, both of whom eventually joined Elizabeth’s fledgling company. After a few months in a Burlingame office, the new company, “Real-Time Cures,” moved to a gritty warehouse near East Palo Alto, where it was renamed “Theranos.” Elizabeth’s energy and enthusiasm helped convinced investors, including wealthy family friends Tim Draper, a venture capitalist, and Victor Palmieri, a former Carter administration ambassador, to commit $6 million to the project by late 2004.

The arm patch proved too difficult, so Theranos shifted to a “cartridge-and-reader system" (17) that took a pinprick of blood onto a credit-card-sized cartridge that was placed into a slot in a toaster-sized reader; the reader would push the blood through tiny tubes into wells coated with antibodies that reacted to blood conditions and sent signals that were read and translated. Results would be sent to a doctor’s computer for analysis. The system would greatly speed up blood assays for all purposes, including drug-efficacy studies at pharmaceutical corporations. By late 2005, Theranos had two dozen employees, funding, an innovative product, and some Silicon Valley buzz as a hot startup.

A second round of funding added $9 million to Theranos accounts. Edmond Ku, a Silicon Valley “fixit” man known for solving knotty technical problems, joined Theranos and took on the job of developing the Theranos 1.0 blood reader into a viable product. Elizabeth, a lifelong fear of needles uppermost in her mind, insisted that the machine make do with a single drop of blood on a cartridge small enough to fit on the palm of a hand.

Ed and his team had to dilute the blood drop with saline and steer it through a miasma of channels fed by chemical reagents and controlled by tiny valves. Cross-contamination from various fluids was an ongoing problem. Ed’s engineers were warned against talking to Theranos’ chemists—Elizabeth liked to control the flow of information so that it passed through her office instead of elsewhere—and Ed found himself stymied. Elizabeth, frustrated by the stalled development phase, told Ed to run his lab 24 hours a day until the job was done, but he balked, insisting his people would burn out at such a pace. Elizabeth, disappointed, cooled to him and began hiring other engineers that reported only to her. Apparently, the new team was competing with Ed’s.

Ed noticed that turnover was high and that top executives, including Henry Mosley—rumored to have been fired for embezzlement—tended suddenly to disappear without explanation. A mysterious internet magnate, a Pakistani named Sunny in his mid-40s, seemed to be living with Elizabeth. She also got periodic advice from board chairman Don Lucas and Oracle billionaire Larry Ellison, both Theranos investors. Ellison in his early years was famous for exaggerating the performance of his buggy products; Elizabeth listened carefully to his counsel.

In August 2007, Ed accompanied Elizabeth to a product demonstration in Tennessee. The prototypes weren’t working properly, so Ed stayed up all night repairing them. At the demonstration, they worked well enough to accept blood samples from two cancer patients and six doctors or nurses. Still, Ed believed the product’s development was being rushed. Later that month, Elizabeth and her company lawyer announced that three former employees would be sued for theft of intellectual property. The FBI had been called in. Onerous security restrictions were implemented; workers felt “under surveillance.”

The competing engineering team bought a glue-dispensing robot. Team leader Tony Nugent built a smaller version, programmed it to do the blood-reading steps ordinarily performed by a lab technician, and installed it in their prototype blood reader. The system worked much better than Ed’s reader. Elizabeth named it the Edison—though other employees referred to it as the “gluebot”—and immediately took it out for presentations to the chagrin of Tony, who hadn’t finished vetting it. Ed’s team was laid off with nary a thank-you. Theranos co-founder Shaunak, troubled by the recent callousness and paranoia, decided to step down and go back to school. 

When Steve Jobs introduced Apple’s iPhone in early 2007, Elizabeth decided that Theranos’ Edison blood reader would be “the iPod of health care” (30), as sleek as an Apple product. She hired designers away from Apple, including one of the iPhone’s fashioners, Ana Arriola, telling them she wanted the Edison to be two-tone like an original iMac, with a touchscreen like the iPhone. Encouraged in turn by Ana, Elizabeth scrapped her frumpy style of dress and began wearing black turtlenecks, like Jobs did, and black slacks.

As with others at Theranos, the new designers found themselves caught up in the company’s culture of paranoia and secrecy. They were often encouraged to gossip to Elizabeth’s assistants about other employees, and they suspected they, too, were being spied on. Ana’s friend Avie Tevanian, a Theranos board member and Apple’s former head of software engineering, also noticed that Elizabeth’s rosy revenue projections were countered by a lack of sales contracts and repeated delays with the Edison’s production. When Avie objected, Elizabeth tried to have him removed from the board. Avie visited board chairman Don Lucas with evidence of irregularities in Theranos, whereupon Lucas told Avie to resign. Frustrated, Avie complied. When Ana suggested that the Edison project pause its rollout to fix the technical kinks, Elizabeth suggested Ana consider resigning. Ana quit. 

Theranos moved uptown from gritty East Palo Alto to classy Palo Alto proper early in 2008. Matt Bissel, head of IT at Theranos and chief spymaster for Elizabeth, arranged the move, but friction with an impatient Elizabeth made him rethink his options. One of the earliest hires, Matt announced his retirement, and suddenly a once-supportive Elizabeth shunned him and tried to dig up dirt on him.

Justin Maxwell, one of the Apple hires and a friend of Ana, took an Edison prototype to the offices of several acquaintances, asking them to try out the machine. It proved hard to use; the device needed more work. Justin playfully printed out a fake Craigslist ad offering two Edison prototypes for sale—“I no longer need a pre-production blood analytic device" (47)—and attached it to the wall of the men’s room. Elizabeth heard about it and called an emergency meeting of senior managers. She later upbraided Justin for his prank: “[H]e was now squarely in Elizabeth’s doghouse" (48).

Sales and marketing chief Todd Surdey told house counsel Michael Esquivel that Elizabeth’s revenue projections were unrealistic. Michael, already concerned about the viability of Theranos’ pharmaceutical partnerships, brought the issue to the company board, which convened an emergency meeting. The board voted to remove Elizabeth as CEO, but, with a combination of contrition and charm, she talked them out of it. Immediately, she fired Esquivel and Surdey. In June, Justin resigned, and another Apple hire left in December. All the Apple veterans were now gone. 

A family friend of the Holmeses since Elizabeth’s childhood was Dr. Richard Fuisz, a wealthy medical equipment inventor. Fuisz’s wife, Lorraine, and Elizabeth’s mother, Noel, were fast friends for years, though their husbands didn’t get along. Fuisz was known for arrogance and vengefulness. Once, angry at partner Baxter International, Fuisz released documents proving they had violated a federal law, forcing them to lose business and pay millions in fines.

In 2005, Fuisz learned of Elizabeth’s new medical company, and, resentful that she hadn’t bothered to consult him for advice, searched for a way to punish her. He looked up Theranos online and discovered a weakness in the design of their blood reader—it needed a chip that contained a patient’s normal blood parameters for comparison to incoming blood work—and promptly began the process of patenting such a device, submitting the application in April 2006. He called it “the Theranos killer” (64).

Midway through 2008, Elizabeth learned of the patent. Her father, Chris, arranged a meeting with his friend, the managing partner at a Washington law firm. Elizabeth asked them for help, but, in a strange twist of fate, one of the firm’s partners was a son of Richard Fuisz: “[T]he optics of the firm going up against the parent of one of its own partners were messy" (66). Reluctantly, they turned her down. 

Chelsea Burkett, a good friend of Elizabeth’s at Stanford, was working at a local startup when Elizabeth invited her to work at Theranos. Chelsea accepted, then discovered that another recruit was Elizabeth’s boyfriend, the overbearing Sunny Balwani. Twenty years Elizabeth’s senior, short, and portly, the native Pakistani—a multi-millionaire from the sale of a small startup company—was now Theranos’ “executive vice chairman” (68). Elizabeth downplayed his role to the board, but Sunny seemed to be involved in everything and tended to be pushy and demanding, “barking orders and dressing people down" (69). Chelsea considered him “bad news.”

Chelsea took the Edison device to Antwerp, Belgium for a demonstration, but the machine continued to be buggy. The small blood samples required a lot of dilution to fill the machine, which weakened the assay signals; transmission of data by cellphone could be spotty; and the internal heaters that tried to keep the reader warm enough to handle properly the tiny blood samples sometimes couldn’t do the job in cool hospital rooms.

A swine flu epidemic was sweeping through Mexico, and Elizabeth sent Chelsea and Sunny there to show how the Edison could be used to analyze blood samples and calculate the future spread of the disease. Theranos needed a success: Already it had burned through $47 million from three rounds of funding. For weeks at a hospital in Mexico City, Chelsea took blood samples acquired from patients and input them into a bank of two dozen Edisons. The readers often malfunctioned.

Sunny followed the flu outbreak to Thailand, where he tried to set up testing stations using suspicious means that may have included bribery. Meanwhile, Sunny became the “hatchet man” who fired employees. Everyone at Theranos feared him. Early in 2010, Chelsea told Elizabeth that she wanted to resign but said it was because she wanted to move to Los Angeles to be closer to her boyfriend. Elizabeth and Sunny made her leave without saying goodbye to her team members: “They’d wanted to control the narrative of her departure" (80).